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A double dip recession, fear and keeping an open mind.

August 27th, 2010 · Greg Atkinson · 32 Comments

Well the Dow Jones closed this morning below 10,000 and for those financial writers who focus more on grabbing reader’s attention rather than on facts, that can only mean one thing: the U.S economy is heading for a double dip recession! Of course the fact that the U.S economy is actually expanding, as are other major economies like China, Japan and Germany, appears irrelevant to many market commentators who seem intent on making investors fear that another economic crisis is at hand.

I am not suggesting that the U.S economy is doing great, quite clearly it isn’t. But to start talking about a double dip recession in the United States is premature. Of course it is possible, but it is also possible that consumer confidence in the U.S will pick up and the U.S economy will return to an extended period of growth.

Clearly markets across the world have not been doing well over the last few weeks. Investors are still a very nervous lot and are more inclined to sell when bad news surfaces rather than to hold or buy on the dips. Every few weeks we hear about some worrying trend regarding the Chinese economy and as usual we are bombarded with the usual stories about deflation in Japan, as though deflation is some sort of disease that sucks the life out of people as they walk to work.

But the unemployment rate in Japan with deflation is currently 5.2%, whereas in good old inflationary United States the unemployment rate is around 9.5%, so I would imagine there are a lot of people in the United States without work that could handle a little deflation in their lives.

As I have discussed before in: Is deflation really such a bad thing? I believe economists and policy makers focus too much on fighting deflation and end up causing much bigger problems when they become obsessed with this battle. In any case I would argue that a little deflation (say 1-2%) is no worse for an economy for a few years than a little inflation. The more policy makers and central bankers try and fight economic cycles the worse they seem to make things.

One minute Gordon Brown was the hero of the European Union (EU) for propping up U.K banks and initiating a massive government spending programme to support the economy, the next minute he is a villain who is voted out of office for getting the U.K. into so much debt. Perhaps a little of deflation in the U.K would have given consumers more buying power, saved the government some money and actually helped the economy?

At the moment many attention seeking commentators and journalists in the financial media are focused on spreading the message that a second global financial crisis is a very real possibility, a double dip recession in the U.S is likely and that the global economy could slip into the abyss.

Remember that a lot of these individuals are the same people who were saying back in 2008 that the capitalist system was about the collapse, that paper money would be basically worthless and the world (not just the U.S) was heading for a depression.

Well the capitalist system continues to function, paper money still works well at the local shops and there has been no global depression.

Sure a lot of western economies don’t look very healthy, but this is hardly going to stop the rise of the Indian, Indonesian and Brazilian economies. It could just be that the major developing economies will actually drag some of the sick major developed economies like the U.S and U.K out of the doldrums.

I am not saying that investors should not be cautious. For example one thing that does worry me is weakness in oil prices and global oil consumption.

According to an article in the Economic Times today:

” Oil inventories in the industrially advanced OECD countries that International Energy Agency (IEA) tracks have also been rising for long. From 92 days of consumption by end 2009, inventories now make up for 96 days of consumption of these countries — a level witnessed only in the first half of 2009.

Globally, crude oil production has consistently remained ahead of consumption for a long time. OPEC, which sets production quotas considering the world’s requirement of crude oil after reducing the non-OPEC production from total demand, has been investing in adding more production capacity and hence has been unable to restrain its member countries in maintaining production levels. “

(see: Crude oil: Weak global outlook, a major worry )

What this suggests to me is that the demand for oil across developed OECD nations is reflecting the weakness of these economies. However OPEC members nations continue to pump out too much oil and thus we have an oversupply issue, hence oil prices are probably lower than they could and should be.

Lower oil prices however are good for economies like India’s and China’s, so even news about lower oil consumption across the OECD is not all bad.

So before we become too pessimistic about much of the economic data that we believe to be bad, we need to step back and look at the information or figures from another angle. For example maybe lower oil prices is just what the global economy needs right now? Maybe the global financial crisis that has put the brakes on many developed economies is actually giving some developing economies a chance to expand further?

There is no doubt that many of the world’s major economies are struggling to deal with the aftermath of the global financial crisis. But this does not mean that they are about to lurch towards another crisis. A sick patient who is recovering from a major operation doesn’t suddenly start partying again, so we shouldn’t expect the global economy to suddenly put back on it’s dancing shoes.

In my view the global economy is indeed slowly recovering. This doesn’t mean that things will ever be quite the same as before, but on the other hand we shouldn’t talk ourselves into living in a constant state of fear either!


32 responses so far ↓

  • 1 Biker // Aug 27, 2010 at 11:20 am

    Only _fear_ can explain the almost certain downward movement in our shares every time the Dow falls.

    I can understand that negative response across NH markets… and I understand how immense the US economy is… but the old ‘sneeze/catch cold’ phenomenon is only comprehensible if we believe that Australia and the US are ‘the same’.

    We aren’t. There are similarities in our cultures and language, but our circumstances (right now) are entirely different.

    But while fear shackles us to a seriously-ill giant, our markets are exposed and vulnerable. This only scares me spitless because my kids assets are around 30% in shares… . πŸ™

  • 2 Jason D // Aug 27, 2010 at 11:33 am

    Nice post

    What always get me about this is news stories about the sky is falling and their will be a double dip…. personally i dont think they have even come close to getting out of the first one let alone have the ability to go into another one.

    Unemployment is still high and frankly little has changed in the last year, housing sales and prices …. dito, company anouncements have had little substance… so no idea where the share market gain it had made was based on.

    So much money has been pork’ed out and frankly little to show for it, i certainly believe that they could have achieved the same result with a lot less money.

    Look at the current M&A activity (which is the normal sign of the next economic stage) is not coming from the US but from Asian countries and Australia.

    My biggest concern is the cross border debt that is held outside the US, the problems in Europe highlighted potential snow ball effects due to cross border debt.

  • 3 Jason D // Aug 27, 2010 at 11:37 am

    Nice comment Biker, i think part of the problem is a lot of brokers and market traders do not do their own research and rely heavy on US based research. For example the last round of figures that got released and caused the current drop was really not a big surprise for me, so the question i have to ask is why is it a surprise to them?

    Like really i am a pissy little fry i only managed about $15mil in funds yet for me it was little surprise, and frankly i have not invested any money in the US for over 8 years now

  • 4 Ned S // Aug 27, 2010 at 1:09 pm

    Some comments in here on Japan and deflation:

    http://www.marketoracle.co.uk/Article22199.html

    Some interesting thoughts thoughts on a bunch of things in fact.

  • 5 Biker // Aug 27, 2010 at 1:55 pm

    Very interesting stuff, Ned.

    I find it strange that he criticises economists who tell us what ‘should’ happen… and then says:

    “What Investors Should Do

    The U.S. Fed and the Bank of England are going to keep printing money which is a big positive for asset prices such as stocks. For investors the strategy remains to invest in inflation wealth protection and growth such as agricultural commodities, gold, silver, metals and mining, TIPS, emerging economies such as China, India, Russia, Chile, Brazil, and developed economies such as Australia and Canada as their appreciating currencies will protect your investments purchasing power in sterling and dollars as covered at length in the Inflation mega-trend ebook”

  • 6 Ned S // Aug 27, 2010 at 3:16 pm

    Keep in mind that particular bloke’s comments should be read within the following context Biker:

    * He is a trader.
    * And an older one.
    * He has commented in the past that he doesn’t want much more than 25% maybe (the eqivocation is me not being able to recall the exact % he mentioned) of his assets in stocks – As they are high risk.

    I gather that a reasonable portion of his loot is in fixed term deposits and/or bonds (?) that are still paying about 7% or 8% which he figures is pretty good. With the plan being to move a fair bit into property once the terms are up. Maybe he’s a bit worried in that regard re his inflationary predictions?

    The rest of the stuff published on that site tends to be the usual fear based end of world scenarios. But his stuff seems (to me) to be quite considered and well worth a read. Although as a trader he certainly agrees with you when you say things like ‘remain flexibile’. And he regularly updates his assessments.

  • 7 Greg Atkinson // Aug 27, 2010 at 3:31 pm

    It always amuses when when I hear American’s talk about Japan’s “lost decade” because over the last decade the U.S has racked up a mountain of debt, locked up more people than ever before and launched a couple of overseas military incursions/invasions that don’t seem to have gone very well.

    Maybe the United States is actually in their own lost decade now?

  • 8 Ned S // Aug 27, 2010 at 3:42 pm

    I think a lot of the Brits keep having to come to terms with the fact that ‘it’ keeps happening to them Greg. While the Americans are struggling to come to terms with the fact that ‘it’ might be about to begin to keep happening to them?

    I did enjoy that other bloke’s assessment of Japan though. Much of it seemed to align with your’s.

  • 9 Biker // Aug 27, 2010 at 4:36 pm

    “But his stuff seems (to me) to be quite considered and well worth a read.”

    I agree, Ned. Seemed to have been dipped in gilt a little too much for my liking. πŸ™„

  • 10 Ned S // Aug 27, 2010 at 5:02 pm

    Again – I’d be pretty surprised if he doesn’t realise just how high risk gilt is even though he does have an inflationary bent. And would imagine his personal allocation is quite low.

    Recall his comment in relation to someone else’s comment (mabye 6 months ago?) that gilt could go to $600 – It went along the lines that if it did then he’d be a buyer.

    Must admit I could well have skimmed to the point of skipping bits of the article that might have made me feel a bit ‘gilty’ – I’ve gotten a bit tired of hearing about it. πŸ˜‰

  • 11 Ned S // Aug 27, 2010 at 5:35 pm

    “Maybe the United States is actually in their own lost decade now?” – And they’ve already had the advantage of plenty of recent immigrants who are prepared to work for bugger all Greg. Yes, a few structural reforms in their economy would seem to be required?

  • 12 Biker // Aug 27, 2010 at 5:51 pm

    “…the advantage of plenty of recent immigrants who are prepared to work for bugger all..”

    …and pay no taxes at all, Ned. In southern California, we realised that the black economy dwarfed anything we’d ever seen. No wonder California and Florida are _deep_ in the mire… !

  • 13 Ned S // Aug 27, 2010 at 6:52 pm

    “pay no taxes at all” – That’s logical Biker. Thanks for that bit of info. They’ve certainly let their standards slip. Most of the migrants I know here are doctor and lawyer and dentist and genetecist and accountant types. Plus the students of course. And by and large they probably pay at least as much tax as most Aussies in equivalent situations if only because they mightn’t have fully figured out how not to yet? But they will! πŸ™‚

  • 14 Vince L // Aug 27, 2010 at 7:35 pm

    Jason I’m with you. I think we are not yet through the first downturn and in a very delicate recovery stage.

  • 15 Ned S // Aug 27, 2010 at 8:43 pm

    Must admit I’ve been pretty much scared witless by it for the best part of 2 years now Vince – I try to keep a bit of an extremely uninformed eye on what is going on, have an exceptionally low risk threshold, reckon our pollies are just maybe the only people in the world possibly even stupider than me, but would like to survive finacially regardless if at all possible. And as I know I’m way too stupid to survive in highly volatile asset classes, can tend to get sidetracked sometimes chatting about somewhat less volatile ones with at least one other bloke who frequents this site on occasion. And have barked at you when I’ve felt you’ve reckoned such chats were pissing you off? Cheers! πŸ™‚

  • 16 Biker // Aug 27, 2010 at 8:59 pm

    Hey, c’mon fellas… . Unemployment at record lows… interest rates at 2.74% lower than they were… markets coupled to the rising Asian giants…. secure banks… and our dollar is holding well. What more can you want? πŸ™„

    Have to agree the share market is a bit of a worry. Always has been a bit of a worry, frankly. Like Ned, I’m not really savvy enough to play that game. My mate Jack is, but there’s very, very few in the pack making a quid these daze… . πŸ˜€

  • 17 Ned S // Aug 27, 2010 at 9:33 pm

    “What more can you want?”

    I’m not sure I’m always especially comfortable with you doing that rolling the eyes thing after making such statements Biker? – But yep, I’ve just been chatting to one of my mobs back home (we come from 3 different continents) and on hearing that inflation is now only 4% pa went THAT’S GREAT!!! – Only to be told, But the boss has dropped our wage!

    Ah dear, life is full of little challenges … πŸ™‚

  • 18 Ned S // Aug 27, 2010 at 10:07 pm

    Enough, Tamara … Hmmm – Was it Keynes who said that the best approximation to good news ultimately could be that if worse ever came to worst, we eventually ALL get to have a niiccce looonnnngggggg sleep?

    I’m just not a true Keynsian at heart I guess … And think more along the lines that there could be alternative potential playgrounds for this kiddie ‘n his to explore should they beckon I reckon!

    Bugger Keynes; And bugger Marx – Drink Socialism ‘n die ya baskets! πŸ™‚

  • 19 Greg Atkinson // Aug 27, 2010 at 10:56 pm

    Ned I reckon a lot of people who ramble on about deflation in Japan have probably never spent any time here and probably think Kobe beef was named after a U.S basketball player πŸ™‚

    I am definitely in the minority when I say I reckon Japan will do better over the next 10 years than the U.S. The reason for this in my view is that Japan has already done the hard yards and worked a lot of excesses out of the economy, whereas the U.S still has some years of adjustment to do.

  • 20 Ned S // Aug 27, 2010 at 11:05 pm

    Very similar thoughts here in relation to Germany Greg. With my continuing/only concern re Japan being a demograhic one I guess. Plus yes, the debt worries me.

  • 21 Biker // Aug 28, 2010 at 10:43 am

    Well, DR backed Japan as its Next Big Thing… .

    Why Japan… and not China… is incomprehensible to me!~

  • 22 Greg Atkinson // Aug 29, 2010 at 9:44 am

    Biker it is indeed odd DR would back Japan since they ramble on the evils of deflation all the time.

    The issue with China is that they rely a lot being the factory to the world and making things that other companies design. As labor costs rise in China foreign companies will look to lower production costs and this may mean heading elsewhere i.e Vietnam for example.

    It doesn’t get much attention in the Oz media, but there have been quite a few strikes at major factories at China run by foreign firms because the workers have been asking for pay rises. This has got many of these companies thinking about getting production capacity out of China.

    If this turned into an actual trend then things would be interesting.

  • 23 Biker // Aug 29, 2010 at 6:58 pm

    “…I get the suspicion they are losing that though Biker.”

    And that’s where the US still reigns supreme: technology.

    “It doesn’t get much attention in the Oz media, but there have been quite a few strikes at major factories at China run by foreign firms because the workers have been asking for pay rises.”

    We’ve read the reports, Greg. It has even affected Apple.

    I honestly believe that foreign firms pulling out of China might not really affect its economy to the extent we imagine. When our Canadian friend sold off his Chinese air-cond factory, it’s likely some enterprising Chinese (or perhaps even the state) just carried on, business-as-usual. With a domestic economy more than three times that of the US, there must soon come a tipping-point, wherein exports cease to be the driving force… . Maybe as soon as 2020?

  • 24 Greg Atkinson // Aug 30, 2010 at 6:15 pm

    Biker I have only seen very little coverage of the strikes in the mainstream Australian media.

    This report in the Japan times I think is interesting: http://search.japantimes.co.jp/cgi-bin/eo20100830a2.html

    I doubt exports will stop being a driver in China as early as 2020. I am starting to see the same wondrous reporting about China as we got during the rise of the Tiger Economies and we know what happened with those πŸ™‚

  • 25 Biker // Aug 30, 2010 at 7:44 pm

    I think it was the high suicide rate of Chinese workers which first caught our attention, Greg. Surprised you hadn’t seen any Australian press on these issues.

    The debate on state-owned vs privately-owned businesses in China is the other big story at the moment. NY Times just carried a three-page report. Must find the link.

    We’re OS for a long trip next year. I’ll try to wangle a month looking at China firsthand.

  • 26 Greg Atkinson // Aug 31, 2010 at 11:47 am

    I saw the stories about the Apple supplier Biker, the world did πŸ™‚ That is just the tip of the iceberg.

    Anyway here is a gem of a statement from the good old RBA as reported in the SMH today:

    “There is a risk the world will fall into a double dip recession, but its likelihood is hard to quantify, the Reserve Bank of Australia (RBA) says.”

    That statement covers just about everything and says nothing!

  • 27 Biker Pete // Aug 31, 2010 at 12:12 pm

    What it says to me is that the RBA is unlikely to raise rates for a while. Having done so once not-that-long-ago (and then had to very quickly backpedal!) they’re liable to remember that faux pas, which eventually led to unprecedented full-page interviews with Mr Stevens! πŸ™‚

  • 28 Vince L // Sep 1, 2010 at 8:55 pm

    Today many of the same people talking about doom and gloom a few days ago were getting excited about Australia’s GDP numbers. Go figure.

  • 29 Greg Atkinson // Sep 2, 2010 at 5:26 pm

    Yes a lot of market watches appear to move from gloom to doom depending on what they see when they have coffee in the morning. I am not in the “double dip” recession camp.

  • 30 Vince L // Jan 10, 2011 at 12:15 pm

    Seems the talk about a double tip recession in the United States has faded from view for now.

  • 31 JasonD // Jan 10, 2011 at 1:54 pm

    Not 100% Greenspan was going on last night about the potential situation with the American Bond Market and government debt… he did put such ? mark around it that its worth noting

  • 32 Senator13 // Jan 10, 2011 at 8:04 pm

    Looks like retailers did not get the boost they wanted over Christmas:

    Retailers bracing for tough 2011 – http://au.finance.yahoo.com/news/Retailers-bracing-tough-2011-aap-2476384035.html?x=0

    Guess that Melbourne Cup Day rate rise had some kick to it?

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